Investment Strategies Flashcards
7 cards from real CPA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Investment Strategies flashcards as text
Which investment strategy attempts to exploit small price discrepancies between identical or equivalent securities in different markets?
Answer: Arbitrage
Arbitrage involves simultaneously buying and selling equivalent securities in different markets to profit from temporary price discrepancies with minimal risk.
A client asks about inflation-protected investments. Which security is specifically designed to protect against inflation risk?
Answer: Treasury Inflation-Protected Securities (TIPS)
TIPS adjust their principal value with the CPI, so both the principal at maturity and periodic interest payments rise with inflation.
In a rising interest rate environment, which bond characteristic provides the greatest protection against price decline?
Answer: Short maturity and high coupon
Short maturity reduces interest rate sensitivity, and high coupons lower duration, both minimizing price decline when rates rise.
Which measure captures the abnormal return of a portfolio above what CAPM would predict, given its level of systematic risk?
Answer: Jensen's alpha
Jensen's alpha measures the portfolio's actual return minus the CAPM expected return, representing manager skill or luck beyond systematic risk compensation.
A hedge fund employs a long/short equity strategy. This involves:
Answer: Buying undervalued stocks and short-selling overvalued stocks simultaneously
Long/short equity simultaneously takes long positions in undervalued stocks and short positions in overvalued ones, reducing market exposure and seeking alpha.
Which asset allocation approach adjusts the portfolio mix based on changing market conditions and economic outlook?
Answer: Tactical asset allocation
Tactical asset allocation makes short-term deviations from the strategic target mix to capitalize on market opportunities or reduce risk based on current conditions.
When analyzing a mutual fund's performance, the expense ratio is important because it:
Answer: Directly reduces the net return earned by investors
The expense ratio is deducted from fund assets annually and directly reduces investor returns dollar-for-dollar, making it a critical factor in fund selection.